ML20030D446
| ML20030D446 | |
| Person / Time | |
|---|---|
| Site: | Waterford  |
| Issue date: | 08/31/1981 |
| From: | Mcdaniel S ASSOCIATED UTILITY SERVICES, INC. |
| To: | |
| Shared Package | |
| ML20030D434 | List:
|
| References | |
| NUDOCS 8109010401 | |
| Download: ML20030D446 (16) | |
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l CITY OF NEW ORLEANS CITY COUNCIL In the Matter of the Revision of Rates Filed By New Orleans Public Service, Inc.
Increasing its Rates for Utility Service Direct. Testimony of Stuart G. McDaniel' Senior Vice President Associated Utility Services, Inc.
8109010401 h2
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~1 Q.
Please state your name, occupation and business address.
2 A.
My name is Stuart G. McDanie'..
I am a Senior Vice President of 3
Associated Utility Services, Inc., an independent utility consulting 4
firm specializing in rate of return, financial studies, depreciation 5
studies, cost of service stud les, valuation, utility rate case 6
accounting and special regulatory studies.
My business address is 7
155 Gaither Drive, Mount Laurel, New Jersey 08054.
We also maintain 8
a branch office in Honolulu, Hawaii and Harrisburg, Pennsylvania 9
(Weber, Fick & Wilson, Inc., a wholly-owned subsidiary) and an offics 10 in Dover, Delaware.
11 Q.
What was the nature of your assignment in this proceeding?
- 12. A.
Associated Utility Services, Inc., was engaged by the New Orleans City 13 Council to review the application of New Orleans Public Service Company 14 (the Company) for an increase in its rates for gas and electric service, l
15 with respect to all rate making matters and to offer our opinion with 16 regard to the appropriate level of revenue deficiency. My assignment vis 17 to discuss the appropriate test year methodology to be employed and to 18 compute the revenue requirement taking into consideration the fair l
19 rate of return recommendation and the rate base and level of pr-sent net 20 operating income recommended by my associates, Messrs. Frank J. Hanley l
l 21 and Oscar J. Williams.
22 Q.
" ave you prepared an appendix to your direct testimony which outlines 23 in narrative form your education and work experience?
24 A.
Yes.
It is attached as Appendix A.
25 Q.
Have you prepared an Exhibit in conjunction with your testimony?
26 A.
Yes. My Exhibit, which consists of one Schedule, was prepared under l
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I my direction and supervision.
2 Q.
Is the Exnibit correct to the best of your knowledge, information and 3
belief?
4 A.
Yes.
5 Q.
What is the test year proposed by the Company in this proceedirg?
6 A.
The Company has proposed a test year based on the expected or budgeted 7
results from operations for the twelve months ended December 31, 1980.
8 No actual results of operations for 1980 have beer. included in the 9
test year data.
Certain adjust =ents to the budgeted data have isen 10 proposed as well as adjustments related to known changes which are 11 expected to occur in 1981.
The Company also proposes to relate the 12 actual and projected results of operations to an end-of-period rate 13 base at December 31, 1980.
14 Q.
Will ycu pleace describe the basic methods that are employed by regulatory 15 agencies to determine a utility's revenue requirement from an accounting 16 standpoint?
17 A.
There are three basic methods that are generally employed by regulatory 18 agencies and certain variations or combinations thereof.
The first 19 basic method is referred to as the " average" method of determining the i
20 utility's revenue requirement.
In this case, actual historical results 21 of operations (revenues and expenses) are related to a rate base that is 22 computed on the basis of an average of the rate base elements for the l
23 same period covered by the results of operations.
The average rate 24 ba.-e can be esiculated employing the beginning and er. ding year average 25 of the rate base elements, a thirteen (13) month average, or the mid-point 26 of the test year or a combination thereof.
The specific methodology _. _
I selected should be the one which will produce an average rate base which
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2 is most representative of the actual Sis *.urical test year.
The second 3
method is the "end-of-periot ' method.
In this instance, the actual 4
results of operations for a twelve month period are adjusted to reflect 5
the level of operation as of the end of the test period.
This figure 6
is related to a rate base that is developed as of the end of the sane 7
period selected.
The third and final method is what may be referred to 8
as che " future" method. When this technique is employed, the expected 9
results of operations for a twelve month period are projected into the 10 future and this result is applied to a rate base that is developed 11 based on an estimate of the average :tte base for the future period 12 selected.
This method is identical to the " average" method except a 13 future period of time is employed as cpposed to an historical period.
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14 In addition, there are variations or combinations of the above methods, 15 such as the use of actual and projected data.
16 Q.
In your opinion, which method do you believe is most appropriate for 17 the purpose of computing a utility's revenue requirement?
18 A.
Utility rates are set by regulatory agencies fer use in the future, and 19 seldom, if ever, are applied retroactively.
Thus, in order to arrive 0
at fair rnd reasonable rates for utility service, regulation should i
21 endeavor to develop a level of net earnings and rate base that will 22 be reasonably representative of the near-term freure--the period new 23 rates will be in effect.
This clearly indicates to me that during times 24 of continuing and persistent inflation, the use of the historical 25
" average" method will not produce s result that is reasonably repre-26 sentative of the time period the new rates for utility service will.
i be in effect.
I would. add that many regulatory commissions that had 2
1istorically used the average methoo for rate making purposes have 3
abandoned it recent.'.y because it did not prove to be a reliable 4
indicator of future operations, primarily due to the significant 5
inflation of the 1970's.
Accordingly, in my opinion, a proper 6
application of the "end-of-period" or the " future" method is the 7
most appropriate method for rate making purposes in these times of B
significant inflation.
It is an unfortunate fact of life today that 9
most utilities, particularly electric, gas and water utility, seldom, 10 if ever, approach achieving the opportunity rate of return established 11 by regulators, the end result of which is frequent requests for rate 12 relief.
i 13 Q.
Are there difficulties associated with the use of end-of-period or 14 future test year?
15 A.
Of course.
The principal difficulty with the use of the end-of-period 16 method lies in the annualization of revenues and expenses to assure 17 harmony with the end-of-period or" terminal rate base.
There are as 18 many annualization techniques as there are people who make such 19 calculations.
Moreover, when the end-of-period method is employed, 20 care must be exercised to assure that adjustments for changes which 21 become "known and measurable" after the end of the test year are 22 unrelated to changes in capacity.
The principal difficulty with the use 23 of a future test year is simply the fact that operating revenues and 24 expenses are based on estimated future costs and not on the accident 25 of history actual coste, at least in part.
When a future test year is 26 used, it is, however, possible to " test" the revenue and expense figures. - -.. - - -
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to confirm their reasonableness for rate making purposes.
Most large 2
utilities have very sophisticated budgeting procedures which increases 3
the reliability of using budgeted data.
4 Q.
Under what circumstances would you advocate the use of the end-of-period 5
method?
6 A.
I believe that the use of the end-of-period method is appropriate for 7
utilities (principally smaller utilities) which do not have available 8
accurate and reliable projections of future operations (revenues and 9
expenses) and investnent in utility plant; or, from a regulator's point 10 of view, a utility which proposes the use of the end-of-period method 11 even though accurate and reliable budget data may be available.
12 Q.
Under what circumstances would you endorse the use of a future test 13 year?
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14 A.
As I have indicated earlier, I believe the proper application of a future 15 test year is the most appropriate method for determining a utility's 16 revenue requirement in these times of significant inflation.
The use 17 of the future test year method turns on the reliability of the data 18 filed by the utility with the regulatory agency.
Generally speaking, 19 when a future ta4t year is employed, actual data becomes available 20 befort the conciusion of the case for some period of the future test 21 year, which can be used as a guide to " test" the reasonableness of the 22 projections.
Sometimes it is possible to " update" the future test year j
23 by using several months of actual data along with updated projections i
24 of the remaining months of the test year.
25 Q.
What is the test year you recommend for use in this proceeding?
26 A.
Based on information provided me by my associate, Mr. Oscar J. Williams,
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1 I believe it is appropriate for the City Council to use the future test 2
year approach in determining the revenue requirement for the Company.
3 Q.
In other words, you accept the test year proposed by the Company, namely, 4
calendar year 1980 on a projected basis?
5 A.
Not entirely. While I have accepted a twelve month period of time which 6
coincides with that proposed by the Company, I do not agree with the 7
Company 's application of the future test year concept.
8 Q.
Please explain.
9 A.
The Company has made two serious errors in its application of the future 10 test year method.
First, they have employed a rate base computed as of 11 December 31, 1980, whereas it should have been computed on the basis of 12 June 30, 1980, or an average of the rate base elements using balances as 13 of December 31, 1979 and 1980 or a thirteen-month average of those balances.
14 The reason it is necessary to use an average rate base calculation is 15 simply the fact that the Company failed to annualize revenues and expenses 16 as of December 31, 1980 to reflect the level of plant investment (or rate 17 base) expected to be in place at that time.
For the purpose of illustrating 18 my point, let us assume that $1,000 of investment (rate base) was placed 19 in service on December 1, 1980, to serve new customers.
Let us further 20 assume that the annual revenues from these customers were expected to be 21
$1,200 annually.
Under these circumstances, if the Compa.y's position 22 were accepted, the rate base would reflect the full $1,000 of new 23 investment while operating revenues (under present rates) would enly 24 include $100; whereas they should include $1,200 if the appropriate 25 adjustment had been made.
Even if the proper end-of-period annualization 26 adjustment had been made by the Company, I would still reject the use of
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I an end-of-period rate base in connection with the future test year 2
approach for the reason that I believe it is too speculative to be 3
used as a guide in establishing utility rates.
It is one thing to 4
make annualization adjustments on the basis of actual known data for 5
some past period of time and another matter altogether to annualize b
on the basis of projections, given the fact that annuali:ation 7
adjustments are, in the final analysis, estimates to begin with; in 8
other words, an estimate based on actual vs. an estimate based on an 9
estimate.
10 Q.
What is the other problem with the Company's application of the future 11 method?
12 A.
The Company reaches into 1981 to give recognition to changes in expense 13 levels they expect to occur after the end of the future test year 14 selected. While I would agree it is appropriate to consider changes 15 which become known and measurable when a historical test year is used, 16 I do not believe it is appropriate to consider such changes in the 17 context of the future method, in light of the fact that the future 18 method properly applied should give adequate recognition to cost changes l
13 which are expected to occur during the course of the test year.
Generally 20 speaking, the justification for allowing post-test year adjustments is 21 to offset the impact of attrition. Another way in which to give recog-i 22 nition to attrition is to set rates on the basis of a future test year.
23 To use a future test year and then make further adjustments for changes l
24 occurring beyond the end of the future period is, in effect, double 25 recognition of the ireact of attrition.
26 Q.
Have you computed the indicated revenue deficiency of the Co4 any based l
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1 on your recommended proper application of a future test year?
2 A.
les.
That information is shown in my Exhibit, Schedule No. 1.
As 3
can be observed by reference to Schedule No. 1, I have employed the 4
average rate base and net income available for return as developed by 5
my associate, Mr. Oscar J. Williams.
These calculations indicate 6
the rates of return at present rs*.es to be 6.04% on a total company 7
basis and 7.11% for the electric division and
.92% for the gas division.
8 Based on tSa recommended fair rate of return developed by my associate, 9
Mr. Frank J. Hanley, of 9.78%, the indicated required return is $21,816,756 10 on a total company basis and $18,058,513 for the electric division 11 and $3,758,243 for the gas division.
These figures, compared to the 12 present net income available for return, indicate a deficiency in return 13 of $8,333,132 on a total company basis and $4,929,334 for the electric 14 and $3,403,795 for the gas divisions.
To these amounts I have applied 15 a conversion factor which includes uncollectibles, revenue taxes and 16 income taxes to arrive at the indicated revenue deficiency of $16,773,615 17 on a total company basis, of which $9,922,170 is electric and $6,851,445 18 is gas.
19 20 21 22 23 24 25 26 _l
CITY OF NEW ORLEANS CITY COUNCIL In the Matter of the Revision of Rates Filed By New Orleans Public Service, Inc.
Increasing its Rates for Utility Service Appendix A to Direct Testimony pf Stuart G. McDaniel, Senior Vice President Associated Utility Services, Inc.
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PROFESSIONAL QUALIFICATIONS OF STUART G. McDANIEL Has served the utility industry for 20 years as a financial manager and consultant, primarily involving financial management of independent telephone companies, and consulting tssignments involving cable television, electric, gas distribution, telephone, vaste disposal, and water companies.
Has tes tified before 22 utility regulatory agencies and several state courts.
EXPERIENCE L974 to Date Associated Utility Services, Inc., Mt. Laurel, New Jersey, Senior Vice President, engaged in consulting assignments for investor-owned utility companies, trade associations, cable television companies, radio ecmmon carriers and governmental agencies.
Engagements have included studies concerning subjects of fair rate of return, rata base, net earnings (including income taxes), tariff design and cost of service.
1965 to 1974 Continental Telephone Corporation, Washington, D.C., Vice President-Financial Director for the Eastern Region (last position). Served as l
Chief Financial Officer for some 35 foreign and domestic telephone subsidiaries located in Eastern United States, Canada and the Bahamas.
Was directly respaasible for secounting, budgets, finance, races and tariffs and intercompany toll aettlements. Prepared financial data for presentation in regulatory commission proceedings involving rate adjustments, mergers, acquisitions, financing, service improvement programs and toll settlements.
1960 to 1964 General Telephone Company ot' the Midwest, Grinnell, Iowa, Internal Audit Manager, responsible for audits of various operations of the company, includix; purchasing, time reporting and business office audits.
Served also as Chief Accountant for several newly acquired subsidiaries
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prior to merger.
Stuart G. McDaniel Page 2 Partial List of Clients Setved ELECTRIC OR COMBINATION Duquesne Light Company Pennsylvania Power Company Nantahala Power and Light Company GAS Alaska Gas and Service Company Honesdale Gas Company TELEPHONE Cencom, Inc.
Millry Telephone Company Commonwealth Telephone Company The North-Eastern Pennsylvania Tel. Co.
Continental Telephone Corporation Public Telephone Corporation Georgia State Telephone company Sitka Telephone Company Kentucky Telephone Company South Canaan Telephone Company Indiana Telephone Corporation United Te.'.ecommunications, Inc.
Marianna & Scenery Hill Telephone Co.
Virgin Islands Telephone Corporation United Telephone Company of Florida Mid-Continent Telephone-Corporation Mid-Michigan Telephone Corporation Mid-Penn Telephone Corporation WATER American Water Works Consumars Water Company Commonwealth Water Company Shenango Valley Water Company Monmouth Consolidated Water Co pany New Jersey Water Company REGUI.ATORY AND GOVERNMENTAL Arizona Corporatior Commission Delaware Rivet Port Authority Collier County, Florida Florida Public Service Commission Delaware Public Service Commission Maryland Public Service Commission Chesapeake Utilities Corporation City of New Orleans, Louisiana Delaware Electric Cooperative Delmarva Power & Light Company Diamond State Telephone Company Eastern Shore Cable Television Wilmington Suburban Water Corporation OTHER Communications Properties, Inc. (CATV)
New York Cable Television Association Continental Telephone Corporation (CAT 7)
TASCO "clephone Answering Exchange, Ltd.
Eastern Microwave, Inc.
Telephone Answering Service Association Greater Winnipeg Cablevision Ltd. (CATV) of Wisconsin Illinois-Indiana Cable Television Wisconsin Aasociation of Manufacturers &
Association Connerce
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e Stuart G. McDaniel Page 3 i
Testimony Alabama Public Service Commission Meryland Public Seriice Comission Arizona Corporation Comission Missouri Public Ser/ ice Commission Canadian Radio-Television and Nebraska Public Service Commission Telecommunications Comission New Jersey Bokrd of Public Utilities Court of Chancery, Wilmington, Delaware New York Public Service Co=1ssion Delaware Public Service Commission North Carolina Utilities Comission Federal Energy Regulatory Comission Pennsylvania Public Utilities Comission Florida Public Service Comission Public Utilities Board of Manitoba, Georgia Public Service Comission Canada Illinois Commerce Commission South Carolina Public Service Commissien Indiana Public Service Comission Tennessee Public Service Comission Kentucky Public Service Commission Virginia State Corporation Commission Marion fuperior Court, Indianapolis, Wisconsin Public Service Comission Indiana PERSONAL Education: University of Missouri - Columbia B. S. Business Administration - 1960' Major: Accounting i
Article Published:
" Accounting for Cost of Removal (Asset Depreciation Range)",
Public Utilities Fortnichtiv, February 15, 1979 Cuest Soeaker:
National Association of Water Companies Other:
In August, 1980, was invited to present testimony before the Pennsylvania Special Senate Comittee to Investigate Laws and Regulations Affecting Taxation on Public Utilities.
September, 1980
Exhibit No. CC-7 1
j CITY OF NEW ORLEANS CITT COUNCIL In the Matter of the Revision of Races Filed By New Orleana-Publi'c Service, Inc.
Increasing its Rates,f or, Utility Service Exhibit to Accompany Direct Testimony 1
of Stuart G. McDaniel,, Senior Vice President Associated Utility Services, Inc.
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Exhibit CC-7 New Orleans Public Service Company Summary of Rate Base, Return and Rates of Return at Present and Proposed Rates Test Year Ended December 31. 1r;30 i
Total Company Electric Gas Rate Base
$223,075,219 $184,647,371
$38,427,848 Net Incona Available for Return
$ 13,483,624 $ 13,129,179 354,445 Rate of Returr et l
Pres,ent Rates 6.04%
7.11%
.92%
Council Consultants' Recommended Rate of Return 9.78%
9.78%
9.78%
Required Return
$ 21,816,756 $ 18,058,513
$ 3,758,243 Present R,,eturn
.e 13,483,624 $ 13,129,179 354,445 Deficiency in Return
$ 8,333,132 $ 4,929,334
$ 3,403,798 Conversion Factor
.4968
.4968
.4968 Revenue Deficiency
$ 16,773,615 $ 9,922,170
$ 6,851,445 4
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